Aircraft Receivables Finance

This form of finance differs from the methods of purchasing or owning an aircraft. Aircraft receivables finance is the term used to describe outstanding payments due to an airline. The company or airline will usually extend payment terms to customers or their users of services and provide credit days to make payment. These outstanding obligations for payment are an asset on the balance sheet of the airline. Banks, funds and alternative lenders may come in and provide a facility directly to the airline or supplier; taking an assignment over the invoices or receivables that have been issued to those customers. This receivables finance facility allows the airline to generate capital from their outstanding receivables balance, and facilitates growth.

Aircraft Receivables Finance: An Overview

If you are associated with the airline industry and related financing; and wondering what aircraft receivables finance is, then you have come to the right place. We will discuss how financing works for the commercial and private aircraft industry, and the different methods used for lending and leasing in the aircraft space.

Financing for Commercial Aircrafts

We all know that aircrafts are expensive to acquire. Do you know as per estimated figures by Statista, a Boeing 737-700 costs just under 90 million USD? However, not many airlines can afford to pay this.

You may be surprised to know that airlines typically operate on very low margins. Therefore, they cannot afford to pay for a fleet in cash.

The airlines interested in buying a commercial aircraft use a more sophisticated debt and lease financing scheme for the purchase. The most common types of these financing schemes for commercial aircrafts are operating leasing, secured lending, and finance leasing.

However, the three schemes mentioned above are not the only ways airlines can pay for their aircraft. They can use alternate methods, including:

• Cash
• Finance leases/bank loans
• Tax leases
• Sale/leasebacks and operating leasing
• Manufacturer support
• Loans with Export Credit Guarantee
• EETCs

Accounting and tax considerations are the prime factors that make these schemes distinguishable. These considerations particularly include operating and interest costs and tax-deductible depreciation that may reduce tax liabilities for the airline operator, financier, and lessor.

Financing of Private Aircrafts

Financing of private aircrafts is somewhat similar to your automobile loan or a mortgage. A basic purchase transaction for a small corporate or personal aircraft may include the following steps.

• The borrower is required to provide their basic personal information to the lender, and details of the aircraft that they want to purchase.
• The lender will then perform the aircraft’s value appraisal.

Other important checks by the lender will include performing a title search on the aircraft’s registration number. The purpose is to confirm that no title defects or liens are standing against the aircraft. In most cases, the lender procures some kind of title insurance policy to protect themselves from any concealed defects in the title.

Plus, it is usually tax-exempt on two conditions. The first one is that at least 50 percent of the aircraft manufacturing takes place in the US. The second condition requires that at least 50 percent of the aircraft’s flight miles come from flying outside the US.

This lease requires extensive and complicated documentation; therefore, they are only ideal when purchasing expensive aircrafts such as Boeing 747s that cost between 240 and 260 million USD.